Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 18, 2005
The January 12 reports confirmed the big crop and growing stock picture for grains and oilseeds. The corn crop estimate increased to 11.807 billion bushels, a record by some 1.6 billion bushels. Ending stocks in corn were 1.087 billion bushels in crop year 02/03, dropped to 958 million bushels in 03/04 (which brought us the high prices early in 2004) and now zoom to a 1.960 billion estimate for the 04/05 crop year. Corn futures are making new lows and soybeans plummeted late last week on rumors that China was switching from the U. S. to Brazil to buy soybeans. The funds sold corn after the report changed the fundamentals and wheat was not able to hold price levels in the middle of the pressure from declining soybeans. Wheat stocks in the U. S. are not huge, but they are big and growing again at the world level
March soybeans dipped to $5.19 late last week, and appear ready to take out the lows around $5.10 from back in November. November is headed lower as well and will also challenge the November lows after closing down to $5.41 late last week. It appears we will have to wait on export movements and weather threats to the South American crop to get rallies to encourage forward pricing in this market. With the November 2005 futures below $5.50, I would carry the risk in the cash market if you have no forward pricing in place and wait for rallies. If you have short hedges at higher levels going back to the first half of 2004, hold the short hedges. I would want to see this market show us some definite signs of a bottom before buying back those short hedges.
Like many big, record crops, the corn crop is getting bigger in the bins. Any bullish sentiment has been threatened by the increase in the crop size that translated into bigger ending stocks. March is closing below $2.00 and the new crop December is below $2.30. I think that users of corn need to get long hedges set and cover corn needs out through the next year in the various corn futures. It would take a significant weather development to add $0.50 or more to this market, but that scenario is unlikely, not impossible. Producers, you will want to hold old crop corn if you have reasonable costs in your storage program and wait on pricing next year's crop. There are private estimates of acreage for 2005 at 82.8 million acres, up from 80.9 million last year. Let's be alert for any small rallies before the late March Prospective Plantings report from the USDA.
The wheat market, for weeks, has seen any effort to rally aborted by the weakness in soybeans and corn, and it happened again last week after the January 12 report. July Kansas City is making a new low with the late week close at $3.14. It may take weather and wind damage concerns in March to get this market into a modest rally, but I believe it will happen and would continue to monitor for better prices. We are well below the first price targets that I identified in last week's letter with most of them above $3.40 on the Chicago and Kansas City July contracts.
Limited volumes of cattle sold as high as $91.50 in Texas late last week, setting up asking prices of $92-93 or $150 in the beef this week. With the markets buffeted by BSE issues and uncertainty about when the Canadian border will open in the face of legal actions to keep it closed, it appears the demand side of the price equation continues to run strong. The Choice boxed beef values closed the week at $154.92, a huge recovery from levels as low as the $130's just a few weeks back. The boxed beef prices are moving higher because consumer demand is increasing and paying the high and increasing prices at retail. February live cattle futures approached $93 early last week and then closed the week at $91.32. I would continue to set and hold short hedges on rallies to these exceptional highs in the February to protect against some unexpected announcement that would be likely to push the market lower. The June futures closed the week at $83.37, and I have no idea why the big discount to the February. I don't think we will see the low $80's in June and would not place short hedges on the summer contracts. I continue to suspect that the packers are long in these distant contracts as we head for herd building and heifer holding in the presence of increasing beef demand for the first time since the early 1970's.
I still like long hedges in the spring feeder cattle, but the BSE and the border closing talk will make the feeder cattle volatile. If the March contract I show again this week approaches its contract highs near $105 from last October, I would take profits on the selective long hedging program we have been discussing in feeder cattle.
Sell the February lean hog futures on an approach to their old contract high near $78 from the fourth quarter of 2004. This contract closed last week at $76.77. I think we will see the bullish buying in this market move out to the summer contracts where the June closed the last week with a new life of contract high at $78.72. Pork demand continues good but there are excellent prices to be had right now in the February and better prices to come, I think, in the late spring and summer contracts.
